Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund. His newest book, Hall of Mirrors:The Great… read more

The Politics of Global Recovery in 2013

DAVOS – Could 2013 be a better year for the global economy than 2012 was? The answer, in principle, is yes. In practice, however, the answer could be more depressing.

In the United States, the pieces are in place for stronger growth. The housing market is finally recovering. The Fed has signaled that it is prepared to do more to support growth and bring down unemployment. All that other US policymakers have to do to ensure that 2013 is better than 2012 is avoid shooting themselves in the foot.

In particular, to eliminate the uncertainty that continues to depress consumption and capital spending, they need to avoid “fiscal cliffs” (now and in the future), dangerous sequester mechanisms, and the silliness surrounding the periodic approach of the debt ceiling. They also must establish a credible plan for medium-term fiscal consolidation – one that entails both higher tax revenues and expenditure reforms, but only once the economy is strong enough to handle such measures.

Can US policymakers achieve this bare minimum? The consensus forecast for US growth in 2013 is lower than for 2012, which is not a vote of confidence that they can.

Similarly, it should not be hard for Europe to do better in 2013, given how dismally 2012 turned out. The elements of a banking union, starting with a single supervisor, are beginning to materialize. The European Central Bank has promised to do more to support the eurozone periphery. Even the International Monetary Fund believes that the slight eurozone contraction in 2012 will turn into a limited expansion in 2013. By the eurozone’s modest standards, that is progress.

But here, too, policy blunders could torpedo hopes for improvement. Negotiations over the banking union could collapse. The ECB could keep interest rates stubbornly high and fail to reach the agreements with peripheral governments that are needed so that it can buy their bonds on the secondary market. Governments could double down on their failed austerity policies. Plan A could collapse, with no Plan B in place.

The IMF sees China’s GDP growth accelerating in 2013. The Chinese economy remains heavily dependent on exports, which should pick up as growth in other countries recovers.

The danger is that the Chinese authorities will continue to do too little to rebalance their economy, allowing vulnerabilities to build up. When export growth softened in mid-2012, they halted the appreciation of the renminbi and rolled out additional costly capital projects like the high-speed rail line – the world’s longest – that was recently completed.

The problem is that growth based on low wages, supported by an artificially competitive exchange rate, cannot continue for much longer. Trophy investments threaten to produce low returns and bad debt. Yet, heedless of the dangers, powerful export interests and regional governments continue to fight for these policies.

The common element is that while the pieces are in place for faster growth in the three largest economies – the US, the eurozone, and China – politics may prevent it from materializing. This means that the needed reforms are as much political as economic.

Specifically, the US needs to address the problem of so-called “super PACs,” political action committees that allow rich special interests and individuals to buy elections. It needs to develop news media that neither channel only one position nor treat all points of view, no matter how absurd, as equally valid. Informed voters need reporting grounded in facts and analysis. When the American public is provided with careful analysis of issues related to gun violence and climate change, for example, we can be confident that it will also be getting reasonable economic analysis.

Europe, for its part, needs political reform at the level of the European Union. It must strengthen the European Parliament’s powers so that the EU has a political counterweight to its increasingly powerful economic entities – not just the ECB and the single banking supervisor, but also the European Commission, which will eventually become the enforcer of fiscal discipline. If stronger EU-level economic institutions are to work properly, stronger EU-level political institutions will be needed to hold them accountable and give citizens voice.

And, in China, greater transparency is needed to control corruption and keep special interests in their place. Chinese policymakers talk the talk, but they have yet to walk the walk.

Japan is the one place where the political system has delivered change that bodes well for faster growth. This is ironic, given that the country’s political system has long been regarded as dysfunctional. But Prime Minister Shinzo Abe, in his second time around leading the government, promises to force the Bank of Japan finally to end deflation, and that the public sector generally will do more to support economic growth.

We actually may be seeing a politician capable of learning from his mistakes and an electorate prepared to reward him for doing so – in the country least likely to witness such a breakthrough. If that is indeed what plays out in Japan, the world will gain a beacon of hope.

Comments

Global Banking business: From laundering money on a global basis to manipulating interest rates paid by consumers and businesses, to improperly foreclosing on homeowners, engineered tax (saving) plans by international banks and other ongoing misdeeds has cost the banks (very well known ones) a record of over $10.7 billion in fines in 2012. It is expected to add another $5billion this year. How then to save the international banks, their franchise and win back customer trust and help the local economy and try and hope to avoid another major global financial crisis:Here is my mantra for all the big and well known international banks who have done "very wrong financial deeds" in the recent past. Today the only hope for these banks (after duly paying all the fines!!!) is to follow this mantra (which will work) to win back "customer trust". The example given below is that of a competitor bank. My mantra applies to all such banks to emulate: My personal research findings: The objective today for the bank is to rebuild its franchise and regain customer trust and business so that the group's financials improve further going forward. There is a sustainable way of doing this to achieve success. Barclays Bank Group - Let's do an out of the box thinking: How to re-build a dead franchise. While the global media bashing goes justifiably unabated, what Anthony Jenkins of Barclays is doing right now is to try and set a workable framework of an ambitious goal for the bank (give him a break) with all his timed initiatives to save and grow the franchise. In this process, he is informing the world that what is needed is a serious relook into the global financial banking system. As starters, he is cleaning up his house by timely communication to his staff that they better acclimatize and adapt themselves to the new morality (purpose and values) failing which … Here he is gearing to starting a long process of quality enforcement exercise of re-establishing trust among its customers, employees, investors and the society. He knows fully well that earning huge returns for their shareholders and executives at the expense of everyone else is since done and gone. Time has come to get the shareholders buy in to actually go deep into the business mechanism and build in ethics to give back to the community and the society at large so as to reduce the growing trust deficit. What can Barclays Bank do today to radically change its business model. A strong commitment to the citizens of the country (where they operate) that they will “stand by them” in assisting in actively managing the social and environmental impact of doing business there and that they will extend “full support” to the community where they operate for profit. Today, if Barclays Bank Group wishes to go forward with redefining its ethical approach and re-developing it’s very badly dented franchise and renew business relationship with their customers, what is needed is “empathy and a very very sincere effort to win back customer trust”. One of the excellent ways to jump start this initiative is by ably demonstrating their involvement in environmental and social consideration in the countries that they are operating currently. In order to make this happen, Barclays Bank need to create a mechanism with the sole objective to better assist their key clients for environmentally-friendly or socially-responsible transactions. What does it entail: It requires a change of mindset to bring about full integration of the needs for economic and social development with that to conserve the environment. His team members should be able to specifically address the banks customers needs with empathy and create an “impact investment” situation and help with financial support and advice about projects aimed at both financial profitability and social impact (poverty reduction, job creation in disadvantaged areas, environmental footprint minimisation, stock carbon, etc.). Examples include the integration of environmental criteria into lending and investment strategy and ! the development of new products that provide environmental businesses with easier access to capital. This will make it possible for the population concerned to increase their income in various countries where Barclays is operating. Going forward the bank should actually apply the Equator Principles, a voluntary credit risk management framework with a set of guidelines for environmental and social risk assessment in sustainable project finance activities. I strongly feel that by adopting these principles, going forward, Barclays Bank’s will be able to ensure their genuine intention to be among the foremost in social and environmental responsibility issues so as to fight against global warming and respect for human rights. This can be a major imperative for Barclays to be effective and prove that its stands by its commitment to the community by extending support to local sustainable development efforts. This is the only method to win back customer trust and rebuild the Barclays franchise and image on a global basis.

Alberto Bagnai, ET AL
want the Greek government to abandon the euro – and all other eurozone members to follow suit.

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